Forming a partnership can be a wise business decision. But circumstances can often change, and unforeseen disputes can happen. In this article, Principal Douglas Raftesath from Meridian Lawyers explains how having a regularly updated agreement is important for protecting each business partner’s interests.
Partnerships in pharmacy can lead to successful and profitable businesses. But what happens when conflicts arise or when it’s time to part ways?
Each year Meridian Lawyers deals with many disputes between business partners. In our experience, we find disputes often happen because the relevant documentation is unsatisfactory or out of date. This results in partners not seeing eye-to-eye on how to deal with commercial matters.
Business partnerships can end for many reasons. For instance, partners may wish to retire, cash-in on their efforts, or seek a career change. Whatever the reason, parting ways does not mean partners need to fall out and end up in a costly dispute. However, in reality, that is often what happens.
From our experience, there are several recurring factors that are the catalysts for conflict. Relatively simple measures can be put in place to limit the risk of costly disputes in the future.
Common causes of disputes
Disputes between partners are often caused due to:
- a lack of an appropriate and well drafted partnership or shareholders agreement. We often see pharmacists enter into a partnership on good terms where trust and the representations of fellow partners are relied upon, but the partners fail to include critical terms of their agreement in writing which is signed by the partners
- the partners failing to update their existing partnership or shareholders agreement to reflect the changes that have occurred over time
- the uncertainty of respective rights and obligations of each partner as a result of not having a well drafted partnership or shareholders agreement
- the underperformance or breach of an obligation of a partner
- one or more partners having contributed financially to the partnership but with no documented agreement as to how this financial contribution is to be treated. Is it a loan or is it a purchase of further equity in the partnership? If it is a loan, when is it repayable and does interest accrue on the loan?
- management and personality conflicts between partners, and
- unforeseen changes to the dynamics of the partnership.
How to prevent a dispute
Having appropriate provisions in a partnership or shareholder agreement that accurately reflect the current business relationship between partners, will assist in limiting the risk of a costly partnership dispute.
It is important to remember that it is much easier to update a partnership agreement or shareholders agreement when the partnership is going well. If partners have already started to fall out with each other, it is often too late to update the agreement.
A well written partnership or shareholders agreement should at a minimum:
- clearly articulate the ownership interests of each partner, should specify any commitment that has been made by a partner such as capital investment, and should set out a process for the control of any business loans to or from a partner
- provide simple procedures for partnership meetings or shareholders meetings to take place, the number of partners necessary for the meeting to go ahead, and for decisions of the partnership to be made, and should provide a mechanism for dealing with the decision making process when not all partners agree
- clearly state the basis for partner remuneration and profit distribution
- detail the commitments that are required from partners. For example, are all partners required to work in the business for the same amount of time? Do certain partners have particular obligations that are different to others? What do partners who work in the business get paid?
- clearly detail a process for when a partner decides to leave the partnership
- deal with any restrictions that are to be imposed on retiring partners, and
- have a clear and workable dispute resolution clause.
From our experience, the best time to review a partnership or shareholders agreement and business structure documents is when things are going well.
Resolving disputes
A dispute resolution clause is an important part of every partnership or shareholder agreement. The clause will clearly stipulate how the partners are required to resolve any dispute that arises.
Seeking legal advice as soon as possible is highly recommended to ensure the processes and implications of any decisions made are clearly understood.
Court litigation is expensive and time consuming, and should be considered as an absolute last resort.
In the interests of saving clients significant costs and time, we recommend that partners consider alternative dispute resolution avenues, such as mediation or negotiation, before commencing court proceedings.
We understand that not all disputes can be resolved through alternative dispute resolution and relief from the Court is sometimes more suitably sought.
How we can help?
Meridian Lawyers is a leading pharmacy law practice in Australia. We have acted for many pharmacists throughout the country and are the principal legal advisor to the Pharmacy Guild of Australia.
To learn more visit: meridianlawyers.com.au/pharmacy
For more information regarding partnership disputes or for assistance in drafting a partnership or shareholders agreement or resolving a dispute, please contact Principal Douglas Raftesath.
This article was first published in the May/June 2024 edition of Australasian Pharmacy magazine by the Pharmacy Guild of Australia
Meet our Team
View our Insights